Jamie Dimon, chief executive at JPMorgan, has warned the bank could be over-provisioned by $10bn if ‘better outcomes happened’ or under-provisioned by $20bn if the US hit a double-dip recession © Bloomberg

Citigroup, JPMorgan Chase and Bank of America have warned staff their bonuses will not keep pace with blowout performances in areas such as fixed-income trading and debt and equity underwriting, setting the scene for a record gap between payouts and profits.

Senior investment bank executives at two of the banks told the Financial Times they were trying to “manage expectations” for 2020 bonuses by reminding staff that the wider businesses have booked huge loan loss charges to prepare for a surge in defaults as the pandemic ravages global economies.

At the third, a senior executive said the bonuses were a “huge issue that we are grappling with”, as the bank tries to balance paying people for results with their need to be “good citizens”. This is in an environment where regulators and politicians have curbed shareholder payouts so they will have a cushion for potential loan losses.

Investment banks walk a delicate line on pay every year, as executives try to balance the expectations of some bankers and traders with investors’ demands for cost control and public outrage about millionaire bankers getting richer.

Still, the challenges are greater than usual this year.

“This is the first time since the financial crisis that we’ve had such a dramatic difference between parts of the big banks,” said Alan Johnson, founder of New York-based pay consultancy Johnson & Associates, referring to the gulf in the performance of the banks’ retail business and their advisory and trading divisions.

The group-wide profits of Citigroup, JPMorgan and Bank of America were weighed down by a combined $48bn of loan loss charges in the first nine months of the year, more than three times as much as they set aside for souring loans in the first nine months of 2019.

At the same time, the three banks enjoyed big increases in revenues from parts of their investment banks. These included a 54 per cent rise in fixed-income revenues at JPMorgan Chase and a 42 per cent surge in fixed-income revenues at Citigroup. Equity underwriting and debt underwriting also enjoyed strong gains.

Mr Johnson said issues around pay would be less contentious at Morgan Stanley and Goldman Sachs because they did not have the same exposure to coronavirus-related loan losses as the big lending banks. Morgan Stanley and Goldman have collectively taken just $3.5bn in loan loss charges this year.

A person familiar with JPMorgan’s approach said that the bank would remain “highly competitive” on pay, but that it would be “foolish, short-term, non-disciplined thinking to pay oversized payouts when medium to longer-term expectations (about the broader economy) are still unclear”.

JPMorgan chief executive Jamie Dimon last week warned that his bank could be over-provisioned by $10bn if “better outcomes happened” or under-provisioned by $20bn if the US hit a double-dip recession.

At Citigroup, one executive said bonus pools could be down in some areas where profits were up, but that the bank was conscious of not being out of step with peers. At Bank of America, an executive said final decisions on pay would not be made until later in the year, but that the lender had started “softening people up” for lower bonuses.

“It’s smart to message that (lower bonuses) now . . . If your income is up 50 per cent, probably bonuses will be up 25 per cent,” Mr Johnson said, adding that bonuses would probably be significantly higher in fixed income, up by less in equities, and down in M&A, where fees are running below last year’s after deals dried up in the early months of the pandemic.

An executive at Goldman said the bank would pay for performance, as it did every year. An executive at Morgan Stanley said those who did well would be paid, but that the group would differentiate between people who added value and those who enjoyed big rises in their revenues because of favourable markets. The Federal Reserve’s significant bond purchases led to a fee bonanza across Wall Street in some areas of fixed income.

European investment banks including Credit Suisse and Barclays are debating the same issues, with executives wary about signing off on larger bonus pools while there remains no guarantee regulators will allow them to restart shareholder payouts next year, people familiar with their thinking said.

“Seems simple to me, bonuses will be poor,” said one managing director in London. “If banks can’t pay dividends then big bonuses will be tough or impossible.”

Mr Johnson at Johnson & Associates said that while the “very best” who were unhappy with their packages could “absolutely” move to another bank or hedge fund, the “good and the average” would have few options in the current environment.

The five banks declined to comment.

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